Calculate PED and use it in decisions
Measure how responsive quantity demanded is to price, then connect elasticity with revenue and consumer spending.
Cambridge IGCSE Economics 0455 / IGCSE (9–1) Economics 0987, 2027–2029 Version 1. Apply each model to the stated evidence and qualify conclusions where effects depend on context. Practice is original and self-checked; it is not a Cambridge paper, mark scheme or official grade.
Before you begin
- No prior economics study is assumed. Read the scenario for the decision-maker, the market or economy involved, the time period and the evidence supplied.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If PED has magnitude 0.4, demand is…
What you will learn
- Calculate and interpret PED
- Explain determinants of responsiveness
- Apply PED to expenditure and decisions
Compare percentage changes
Price elasticity of demand is percentage change in quantity demanded divided by percentage change in price. With the usual downward demand relationship it is negative; many comparisons use its magnitude.
A magnitude above 1 is elastic, below 1 is inelastic and equal to 1 is unit elastic. Perfectly inelastic demand has zero response; perfectly elastic demand is infinitely responsive in the simplified model.
Use the result carefully
Availability of substitutes, the share of income spent and time to adjust can affect PED. With elastic demand, a price rise tends to reduce total expenditure or firm revenue; with inelastic demand, it tends to increase it, other things equal.
Consumers, firms and governments can use this relationship, but an elasticity estimate is not a guarantee. Apply it to the product, period and size of price change in the question.
Pause and explain
A firm raises price when demand is inelastic. What is the usual short-run revenue effect, other things equal?
Worked example
Price rises by 10% and quantity demanded falls by 20%. Calculate PED and interpret it.
Show the worked solution
- PED = percentage change in quantity ÷ percentage change in price.
- −20% ÷ 10% = −2.
- The magnitude is 2, which is elastic.
Answer PED is −2 (magnitude 2), so demand is elastic: quantity changes proportionally more than price in this estimate.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Price falls by 8% and quantity demanded rises by 4%. Calculate signed PED and classify its magnitude.
Give me a hint
Divide the quantity percentage change by the price percentage change.
Compare my reasoning
- PED = 4 ÷ −8.
- The signed result is −0.5.
- Magnitude 0.5 is less than one.
PED = −0.5, so demand is inelastic by magnitude.
Look for these in your work
- Ratio correct
- Sign retained
- Classification correct
A firm sees that a 6% price increase is followed by a 9% fall in quantity demanded. Estimate PED and explain the revenue direction.
Give me a hint
Calculate the ratio, then compare percentage price and quantity changes.
Compare my reasoning
- PED = −9 ÷ 6 = −1.5.
- Demand is elastic by magnitude.
- The quantity percentage fall exceeds the price rise, so revenue tends to fall.
Estimated PED is −1.5. Demand is elastic, so total revenue tends to fall after the price rise, assuming other influences are stable.
Look for these in your work
- PED calculated
- Magnitude interpreted
- Revenue chain explained
A transit agency is considering a fare increase. Explain why one PED estimate may be insufficient for a final decision.
Give me a hint
Consider time, substitutes, passenger groups and the agency's objectives.
Compare my reasoning
- Demand may differ by route or passenger group.
- Substitutes and time to adjust can change responsiveness.
- The agency should also consider access, costs and service objectives.
A single estimate may not fit every route, period or passenger group. The agency should consider substitute availability, longer-term responses, costs and access objectives before deciding.
Look for these in your work
- Heterogeneity recognized
- Determinants applied
- Decision qualified
Common mistakes
- Using raw quantity changes instead of percentage changes
- Ignoring the negative sign when the question asks for signed PED
- Predicting revenue from price alone
What can you explain now?
How is PED calculated?
Compare with the explanation
% change in quantity demanded ÷ % change in price
It compares proportional responses.
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Make it stick
How is PED calculated?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.